Monetary Systems and Financial Infrastructure: A Reshaping with the use of Digital Asset Tokenization and Decentralized Finance

Abstract

The rise of real-world asset (RWA) tokenization-converting property, bonds, or commodities into blockchain-based tokens-and its integration with decentralized finance (DeFi) protocols is altering how liquidity is created, credit is intermediated, and monetary signals propagate through the financial system. Rather than replacing central banks, these innovations are rerouting traditional channels: for example, tokenized Treasury bonds on Ethereum now serve as collateral in DeFi lending pools, effectively creating parallel money markets outside regulated banking. This paper investigates the mechanisms through which tokenization and DeFi interact with-and strain-existing monetary and regulatory frameworks. Using a mixed-methods approach (quantitative analysis of on-chain RWA flows, plus interviews with central bankers, fintechs, and supervisors in the EU, Singapore, and Brazil), we ask: (1) How does RWA-backed liquidity in DeFi respond to interest rate changes compared to traditional repo markets? (2) To what extent do DeFi protocols substitute for-or complement-bank intermediation for SMEs? (3) Where do current regulatory perimeters fail to capture systemic linkages (e.g., stablecoin runs affecting tokenized bond markets)? Early evidence suggests that while RWA tokenization can improve market access, it also fragments liquidity and weakens conventional policy transmission-especially when stablecoins (e.g., USDC) become de facto settlement layers. We propose a "functional equivalence" regulatory approach: supervise activities by economic function (e.g., maturity transformation, liquidity provision), not legal form. This work provides timely, empirically grounded input for central banks and regulators navigating the co-evolution of digital and traditional finance.